• Forecasting using high-frequency data: a comparison of asymmetric financial duration models

      Zhang, Q.; Cai, Charlie X.; Keasey, K. (2009)
      The first purpose of this paper is to assess the short-run forecasting capabilities of two competing financial duration models. The forecast performance of the Autoregressive Conditional Multinomial–Autoregressive Conditional Duration (ACM-ACD) model is better than the Asymmetric Autoregressive Conditional Duration (AACD) model. However, the ACM-ACD model is more complex in terms of the computational setting and is more sensitive to starting values. The second purpose is to examine the effects of market microstructure on the forecasting performance of the two models. The results indicate that the forecast performance of the models generally decreases as the liquidity of the stock increases, with the exception of the most liquid stocks. Furthermore, a simple filter of the raw data improves the performance of both models. Finally, the results suggest that both models capture the characteristics of the micro data very well with a minimum sample length of 20 days.
    • Market reaction to earnings news: A unified test of information risk and transaction costs

      Zhang, Q.; Cai, Charlie X.; Keasey, K. (2013)
      We examine how information risk and transaction costs influence the initial and subsequent market reaction to earnings news. We find that the initial market reaction is higher per unit of earnings surprise for higher information risk firms (information content effect). Furthermore, it is information risk that induces transaction costs that limit the initial market reaction and lead to higher subsequent drift (transaction costs effect). Information risk does not have an effect on drift beyond that achieved through transaction costs. Our findings highlight the importance of understanding the linkage between information risk and transaction costs in price discovery around public disclosure.
    • The pricing dynamics of cross-listed securities: The case of Chinese A- and H-shares

      Cai, Charlie X.; McGuinness, P.B.; Zhang, Q. (2011)
      We develop a non-linear Markov error correction approach to examine the general co-integration relation between the H- and A-prices of cross-listed Chinese stock issuers across the period January 1999 to March 2009. We unravel three important dimensions of this relation. These pertain to (i) the long-run expectation of the H- (to A-price) discount; (ii) the level of short-run co-movement in prices; and (iii) the magnitude of error corrections. Findings point to significant improvements in all three areas. Policy and corporate governance change appears to be the principal force driving the efficiency gains. Weakening informational asymmetries underlie much of the change in the markets’ relative pricing. In contrast, sentiment effects strongly underpin the contemporaneous response and error correction adjustments. Finally, the escalating Global Financial Crisis of 2008 appears to have not only bolstered the A- and H-markets’ short-term pricing dynamic but also temporarily increased the long-term H-share discount.
    • Trading Frictions and Market Structure: An Empirical Analysis

      Cai, Charlie X.; Hillier, D.; Hudson, R.; Keasey, K. (2008)
      Market structure affects the informational and real frictions faced by traders in equity markets. Using bid-ask spreads, we present evidence which suggests that while real frictions associated with the costs of supplying immediacy are less in order-driven systems, informational frictions resulting from increased adverse selection risk are considerably higher in these markets. Firm value, transaction size and order location are all major determinants of the trading costs borne by investors. Consistent with the stealth trading hypothesis of Barclay and Warner (1993), we report that informational frictions are at their highest for medium size trades that go through the order book. Finally, while there is no doubt that the total costs of trading on order-driven systems are lower for very liquid securities, the inherent informational inefficiencies of the trading format should not be ignored. This is particularly true for the vast majority of small to mid-size stocks that experience infrequent trading and low transaction volume.
    • Value enhancing learning in diversification experience

      Nguyen III, T.T.; Cai, Charlie X. (2013)
      This paper analyses whether and how organizational learning from diversification experience affects diversification value. Three main findings are reported. First, we find a U-shaped relationship between diversification value and diversification experience. Second, higher similarity in industries of diversifications results in higher diversification value. Finally, value of diversification and temporal interval between diversifications is related an inverted U-shaped curve. In the extension analysis, the paper demonstrates that external learning from others’ experience also affects value of diversification in a cubic pattern. Taken together, the study illustrates the effects learning from both own and population experience on the cross-sectional variance of diversification value.